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Indian Financial System
P. M. Kuchar
Indian Financial System
Indian financial system consists of formal
and informal financial system.
 Based on the financial system financial
market, financial instruments and financial
intermediation can be categorized
depending upon functionality.

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Indian
Financial
System
Formal
(organized
Financial
system)
Informal
(Unorganized
financial
system)
Regulators;
MoF, SEBI,
RBI, IRDA
Financial
Institutions
(Intermediaries)
Financial
Markets
Financial
Instrument
Financial
Services
Money lenders,
Local bankers,
Traders
Landlor
Formal and Informal Financial
System
The financial systems of most developing
countries are characterized by co-existence and
co-operation between the formal and informal
financial sectors.
The formal financial sector is characterized by
the presence of an organized, institutional and
regulated system which caters to the financial
needs of the modern spheres of economy.
The informal financial sector is an
unorganized, non-institutional and non-regulated
system dealing with traditional and rural spheres
of the economy.
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Component of Formal Financial
System
Regulators
Financial Institutions
Financial Markets
Financial Instruments
Financial Services

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Regulators
The formal financial system comes under
the regulations of the ministry of finance
(MOF), reserve Bank of India (RBI),
Securities and Exchange board of India
(SEB) and other regulatory bodies.

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Financial Institutions
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Financial
Institutions
(Intermediaries)
Banking
Institutions
Non-Banking
Institutions
Mutual Funds
Insurance
and
Housing
Finance companies
Public sector Private Sector
Financial Instruments
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Financial
Instruments
Primary
Securities
Equity,
Preference shares, Debt
Secondary
Securities
Time deposits,
MF units
Insurance policies
Financial Markets
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Financial
Markets
Capital Market Money Market
Treasury Bills, Call money Market,
Commercial Bills,, Commercial Papers
Certificates of deposit, Term money
Primary Segment
Secondary Segment
Indian Financial System – An Overview
PHASES
* Upto 1951 Pvt. Sector
* 1951 to 1990 Public Sector
* Early Nineties Privatisation
* Present Status Globalisation

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Indian Financial System – An Overview
Orderly mechanism & structure in economy.
Mobilises the monetary resources/capital from
surplus sectors.
Distributes resources to needy sectors.
Transformation of savings into investment &
consumption.
Financial Markets – Places where the
above activities take place
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Pre 1951


1. Control of Money Lenders
2. No Laws / Total Private Sector
3. No Regulatory Bodies
4. Hardly any industrialization
5. Banks – Traditional lenders for Trade and that too
short term
6. Main concentration on Traditional Agriculture
7. Narrow industrial securities market (i.e.
Gold/Bullion/Metal but largely linked to London Market)
8. Absence of intermediatary institutions in long-term
financing of industry
9. Industry had limited access to outside
saving/resources.

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1951 to 1990
Moneylenders ruled till 1951. No worth-while Banks at
that time. Industries depended upon their own money.
1951 onwards 5 years PLAN commenced.
PVT. SECTORS TO PUBLIC SECTOR – MIXED
ECONOMY
1
st
5 year PLAN in 1951 – Planned Economic Process.
As part of Alignment of Financial Systems – Priorities
laid down by Govt. – Policies.
MAIN Elements of Fin. Organisations
i. Public ownership of Financial Institution
ii. Strengthening of Institutional Structure
iii. Protection to Investors
iv. Participation in Corporate Management
v. Organisational Deficiencies.

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1951-1990

Nationalization
RBI 1948
SBI 1956 (take-over of Imperial Bank of India)
LIC 1956 (Merges of over 250 Life Insurance Companies)
Banks 1969 (14 major banks with Deposits of over Rs. 50
Crs.nationalised)
1980 (6 more Banks)
Insurance 1972 (General Insurance Corp. GIC by New India,
Oriental, united and National.

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1951-1990

Development

• Directing the Capital in conformity with Planning priorities
• Encouragement to new entrepreneurs and small set-ups
• Development of Backward Region
• IFCI (1948)
• State Finance Corporation (1951) Purely Mortgage institution
• IDBI (1964) As subsidiary of RBI to provide Project / Term Finance
• ICICI (1966) Channelizing of Foreign Currency Loan from World
Bank to Pvt. Sector and underwriting of Capital issues.
• SIDC’s & SIIC State Level Corporations for SME sector
• UTI (1964) to enable small investors to share Industrial Growth
• IRCI (1971) to take care of rehabilitation of sick-mills promoted by
IDBI, Banks & LIC-Name changed to IIBI in 1997
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POST 1990s




IMPORTANT DEVELOPMENTS

Development Financial Institutions : (DFIs)
• Started providing Working Capital also
• Set up CREDIT RATING AGENCIES
CRISIL(IPO IN 1993-94; standard & poor acquires 9.68% in 1996-97 S & P
acquires shares / holding up to 58.46%)
ICRA Set up in 1991 by leading FIs/Banks/Fin. Ser. Cos. And Moody’s
CARE Set-up by IFCI/Banks.
FITCH a 100% subsidiary of FITCH Group.

• Privatisation of DFI
Reduction in Govt. holding & Public Participation e.g. IFCI Ltd., IDBI Ltd.,
ICICI Ltd.
• Conversion into Banking / Merger into Banking Companies IDBI Bank &
ICICI Bank
• Issuance of Bond by DFIs without Govt.’s Guarantees to mobilize resources.

• Reduction in holding of Govt. in Banks, i.e. Public Participation / Listing
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POST 1990
INDUSTRIES
• Rise & Growth of Service Sector industries.
• Reliance & Dependence on technology.
• E-mail & mobile made sea-change in communication, data collection etc.
• Computerization – a catch phrase and inevitable need of an hour.
• Dependent on Capital Market rather than only Debts dependency.
• Scalability of operations through globally competitive size.
• Broad basing of Board.
• Professional Management.

NBFC
• NBFC under RBI governance to finance retail assets and mobilize
small/medium sized savings.
• Very large NBFCs are emerging (Shri Ram Transport Finance, Birla, Tata
Finance, Sundaram Finance, Reliance Finance, DLF, Religare etc.

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POST 1990
Commercial Bank
Mutual Funds
Capital Market
Secondary Market
Money Market


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GLOBAL FINANCIAL SYSTEMS

IBRD (World Bank) Long-Term Capital Assistance

IFCI To finance PRIVATE enterprises in the form of loans & equity

IDA Affiliate of World Bank Soft – Loan window of the Bank. Mainly for
developing & under-developed nations. Re-payment period upto 50
years Govt. & Private, both, eligible.

MIGA Multilateral Investment Guarantee Agency – an affiliate of World
(1988) Bank Provides guarantee for investment in needy countries.

ECAFE (Economic Commission for Asia & Far East)
promote investment in Asia & Far East and also finance priority
area. Also co-ordinates with U.N. agencies.

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Global Financial System – An Overview
Functions of Financial Market
• Price Discovery
• Liquidity
• Cost of Transactions (saver search & information costs)
• Transfer of savings from one sector to other
• Reflects as Barometer for economic growth

Financial Assets
• Treasury Bonds
• Debt
• Equity
• Commercial Paper/Debentures etc.
• Euro Bonds.
• Gold/Silver
• Cross Border Bonds /instruments.

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STRUCTURE OF FINANCIAL MARKETS IN INDIA


Financial Markets in India
Debt Market
Primary /
Secondary
Forex
Market
Capital Market
Primary /
Secondary &
Depository
Insurance
Life/General
Banks (including
RRBs, co-op etc)
Mutual Funds,
Venture Funds,
Investment
Bonds
RBI RBI SEBI IRDA RBI RBI/SEBI
REGULATORY AUTHORITY